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The Investment Certificates In The Italian Market: A Comparison Of Quoted And Estimated Prices

Author

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  • BRANDO VIGANÒ

    (Department of Management, Economics and Quantitative Methods, University of Bergamo, Vai dei Caniana 2, 24127 Bergamo, Italy)

  • SEBASTIANO VITALI

    (Department of Management, Economics and Quantitative Methods, University of Bergamo, Vai dei Caniana 2, 24127 Bergamo, Italy†Department of Probability and Mathematical Statistics, Faculty of Mathematics and Physics, Charles University, Sokolovska 83, 121 16 Praha 2, Czech Republic)

  • VITTORIO MORIGGIA

    (Department of Management, Economics and Quantitative Methods, University of Bergamo, Vai dei Caniana 2, 24127 Bergamo, Italy)

  • GIOVANNA ZANOTTI

    (Department of Management, Economics and Quantitative Methods, University of Bergamo, Vai dei Caniana 2, 24127 Bergamo, Italy)

Abstract

Investment certificates are securitized derivatives built as a combination of financial instruments. The financial engineering process aims to create new payoff profiles that allow investors to diversify or to hedge the risk of their portfolios. Such instruments are relatively challenging to price, as highlighted in the recent publications for other European markets. The aim of this paper is to analyze whether in the Italian market there are also differences between the quoted price and the estimated price obtained applying a standard pricing approach well known in the literature. In particular, we analyze three representative certificates, belonging to the classes of target coupon certificates and autocallable certificates, that have been most appreciated by the investors during the last years. To evaluate the price, we propose a Monte Carlo approach that computes directly the payoff of the certificates on a set of scenarios for the evolution of the underlying asset. Moreover, studying the payoff profile of the certificates, we investigate and comment on the recent regulatory debate on “complexity”. We show that complexity, the new parameter behind return and risk, should not be necessarily associated with the engineering level of the financial products and that, sometimes, complexity is not associated with risk.

Suggested Citation

  • Brando Viganò & Sebastiano Vitali & Vittorio Moriggia & Giovanna Zanotti, 2019. "The Investment Certificates In The Italian Market: A Comparison Of Quoted And Estimated Prices," Journal of Financial Management, Markets and Institutions (JFMMI), World Scientific Publishing Co. Pte. Ltd., vol. 7(02), pages 1-18, December.
    • Handle: RePEc:wsi:jfmmix:v:07:y:2019:i:02:n:s2282717x19500026
    DOI: 10.1142/S2282717X19500026
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    Cited by:

    1. Sebastiano Vitali & Vittorio Moriggia, 2021. "Pension fund management with investment certificates and stochastic dominance," Annals of Operations Research, Springer, vol. 299(1), pages 273-292, April.

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